Edexcel A-Level Accounting: Financial statements of organisations (YAC11)

This guide teaches topic 1.3, Financial statements of organisations, from Unit 1: The Accounting System and Costing of the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2 (September 2018). It covers outcomes 1.3.1 to 1.3.22, all International AS content. Unit 1 is available in January, June and October, and calculators may be used in the examination.

Pair it with the revision notes and the practice questions. Depreciation methods belong to topic 1.1: Principles and double entry bookkeeping. See also the Edexcel A-Level Accounting hub, the printable checklist and the free diagnostics.

What this topic covers

Outcomes	Area	What you must be able to do
1.3.1–1.3.2	Sole traders	Statement of profit or loss (gross profit, profit for the year); statement of financial position
1.3.3–1.3.6	Year-end adjustments	Accruals, prepayments, provisions, depreciation, irrecoverable debts and allowances
1.3.7	Departmental records	Columnar statement of each department’s profit or loss
1.3.8	Incomplete records	Both statements from incomplete information
1.3.9–1.3.13	Partnerships	Appropriation, capital and current accounts, the agreement, Section 24, admission and retirement
1.3.14–1.3.19	Clubs	Receipts and payments, activity trading accounts, subscriptions, life membership, losses, income and expenditure
1.3.20–1.3.22	Manufacturers	Manufacturing accounts, cost apportionment, unrealised profit

Use the IAS terms examiners use: revenue, inventory, other receivables (prepayments), other payables (accruals), carrying value.

Sole traders and year-end adjustments (1.3.1–1.3.6)

Revenue less cost of sales (opening inventory + purchases − closing inventory) gives gross profit. Add other operating income and deduct expenses to reach profit for the year. The statement of financial position lists non-current assets at carrying value, current assets, current liabilities, non-current liabilities, and capital (opening capital + profit − drawings).

Every adjustment has two effects:

• Accrued expense (owed at year end): add to the expense; show under other payables.
• Prepaid expense (paid in advance): deduct from the expense; show under other receivables.
• Accrued income: add to the income; other receivables. Income received in advance: deduct; other payables.
• Provisions are amounts set aside for a known cost or loss whose exact amount is uncertain. They are charged against profit (prudence) and reduce an asset’s value or appear as a liability. Provisions for depreciation and the allowance for irrecoverable debts are the two you will meet most.
• Irrecoverable debts are written off as an expense and taken out of trade receivables. Only the change in the allowance goes to the statement of profit or loss; the full allowance is deducted from receivables.

Worked example: Penhallow Lamps

Dilys Penhallow’s trial balance at 30 June 2026 included: revenue 213,700; purchases 121,480; inventory 1 July 2025 15,320; wages 33,960; insurance 4,380; heating 2,915; rent received 3,600; loan interest 450; equipment at cost 56,000; provision for depreciation 21,000; trade receivables 18,250; allowance for irrecoverable debts 520; bank 4,775; trade payables 11,640; drawings 24,600; bank loan (repayable 2031) 9,000; capital 22,670.

Notes: closing inventory 16,840; insurance prepaid 730; heating accrued 285; rent received includes 300 for next year; depreciation 25% reducing balance; write off a debt of 250; allowance to be 4% of remaining receivables.

Working: depreciation (56,000 − 21,000) × 25% = 8,750. Receivables 18,250 − 250 = 18,000; allowance 4% = 720, so the increase is 720 − 520 = 200.

Statement of profit or loss for the year ended 30 June 2026
Revenue                                      213,700
Cost of sales (15,320 + 121,480 - 16,840)   (119,960)
Gross profit                                  93,740
Rent received (3,600 - 300)                    3,300
                                              97,040
Wages                       33,960
Insurance (4,380 - 730)      3,650
Heating (2,915 + 285)        3,200
Depreciation                 8,750
Irrecoverable debts            250
Increase in allowance          200
Finance costs                  450           (50,460)
Profit for the year                           46,580

Statement of financial position at 30 June 2026
Equipment: cost 56,000, depreciation 29,750   26,250
Inventory                                     16,840
Trade receivables (18,000 - 720)              17,280
Other receivables (insurance prepaid)            730
Bank                                           4,775
                                              39,625
Total assets                                  65,875
Capital 22,670 + 46,580 - 24,600              44,650
Bank loan (non-current)                        9,000
Trade payables 11,640 + other payables 585    12,225
Capital and liabilities                       65,875

Departmental statements (1.3.7)

Use one column per department plus a total. Direct costs go to their own department; shared costs are apportioned on a fair basis (floor area for rent, revenue for advertising).

A shop has two departments, Furniture and Soft furnishings. Revenue 120,000 and 80,000; cost of sales 78,000 and 44,000; direct wages 15,000 and 11,000. Rent of 16,500 is apportioned by floor area (2:1); advertising of 6,000 by revenue (3:2).

	Furniture	Soft furnishings	Total
Gross profit	42,000	36,000	78,000
Wages	15,000	11,000	26,000
Rent	11,000	5,500	16,500
Advertising	3,600	2,400	6,000
Profit	12,400	17,100	29,500

Incomplete records (1.3.8)

1. Opening capital from a statement of affairs: assets − liabilities.
2. Credit sales = receipts from customers + closing receivables − opening receivables.
3. Credit purchases = payments to suppliers + closing payables − opening payables.
4. Mark-up is profit as a percentage of cost; margin is profit as a percentage of revenue. Use them to find cost of sales or a missing inventory figure.
5. If only net assets are known: profit = closing net assets − opening net assets + drawings − capital introduced.

Worked example, including a loss of inventory

Bryn Castell’s opening position: van 9,000, inventory 4,200, receivables 3,100, bank 1,850, payables 2,650. Opening capital = 18,150 − 2,650 = 15,500.

Receipts from customers 61,400; closing receivables 3,700. Credit sales = 61,400 + 3,700 − 3,100 = 62,000. Payments to suppliers 38,900; closing payables 2,950. Purchases = 38,900 + 2,950 − 2,650 = 39,200.

Bryn uses a 60% mark-up, so cost of sales = 62,000 ÷ 1.6 = 38,750. Expected closing inventory = 4,200 + 39,200 − 38,750 = 4,650. The inventory count shows 4,410, so 240 of inventory has been lost. Charge it as an expense; 4,410 goes in the statement of financial position.

Partnerships (1.3.9–1.3.13)

The statement of profit or loss is the same as a sole trader’s. The appropriation account then shares the profit for the year. Add interest charged on drawings; deduct salaries and interest on capital; share the residual profit in the profit-sharing ratio.

Capital accounts. On a fixed basis, capital accounts only change when capital is introduced or withdrawn; salaries, interest, profit shares and drawings go to separate current accounts. On a floating (fluctuating) basis, everything passes through the capital account and there are no current accounts.

The Partnership Agreement sets salaries, interest rates and the ratio. Where there is no agreement, Section 24 of the Partnership Act 1890 applies:

• profits and losses are shared equally;
• no partner is entitled to a salary;
• no interest is paid on capital;
• a partner who advances money beyond their agreed capital receives interest at 5% a year;
• Section 24 makes no provision for interest on drawings, so none is charged.

Interest on a partner’s loan is an expense, not an appropriation.

Worked example: appropriation and current accounts

Ines and Marek have fixed capitals of 60,000 and 40,000. The agreement gives 5% interest on capital, a salary of 12,000 to Marek, interest on drawings (Ines 400, Marek 250), and residual profit shared 3:2. Profit for the year is 58,000.

Profit for the year                         58,000
Interest on drawings (400 + 250)               650
                                            58,650
Salary: Marek                              (12,000)
Interest on capital: Ines 3,000, Marek 2,000 (5,000)
Residual profit                             41,650
Ines 3/5                                    24,990
Marek 2/5                                   16,660

Ines’s current account opened at 2,300 credit and her drawings were 26,000: 2,300 + 3,000 + 24,990 − 400 − 26,000 = 3,890 credit. Marek’s opened at 600 debit with drawings of 22,500: −600 + 12,000 + 2,000 + 16,660 − 250 − 22,500 = 7,310 credit.

Admission of a partner, with goodwill and assets

Goodwill is the excess of the business’s value over its net assets. When the ratio changes, existing partners are credited with the goodwill they built up.

Leah joins Ines and Marek. Goodwill is valued at 36,000 and will not appear in the books; the new ratio is Ines 4 : Marek 3 : Leah 2. Leah brings 21,000 cash and a vehicle worth 9,500.

• Credit old partners in the old ratio (3:2): Ines 21,600, Marek 14,400.
• Debit all partners in the new ratio (4:3:2): Ines 16,000, Marek 12,000, Leah 8,000.
• Leah’s capital: 21,000 + 9,500 − 8,000 = 22,500. Debit bank 21,000 and vehicles 9,500.

On retirement, the same goodwill entries apply; the retiring partner’s balances are paid in cash or moved to a loan account.

Clubs and non-profit-making organisations (1.3.14–1.3.19)

• A receipts and payments account summarises the cash book, including capital items, and ignores accruals.
• An income and expenditure account follows the accruals concept and shows a surplus or deficit. Capital is called the accumulated fund.
• Each activity (bar, café, shop) gets its own trading account; its profit is income in the income and expenditure account.
• Life membership fees go to a separate fund and are transferred to income over the period the club chooses.
• Losses of inventory or cash found at a count are expenditure.

Worked example: Moorcroft Rowing Club

Subscriptions: at the start, 215 in arrears and 345 in advance; received 7,860 in the year; at the end, 130 in arrears and 455 in advance.

Subscriptions account
Dr  Balance b/d (arrears)  215  | Cr  Balance b/d (advance)  345
    Income and expenditure 7,665 |     Bank                  7,860
    Balance c/d (advance)  455  |     Balance c/d (arrears)   130
                          8,335 |                           8,335

Café: takings 14,200; opening inventory 900; supplier payments 8,100 with payables rising from 600 to 750, so purchases are 8,250; closing inventory 1,050. Cost of sales = 900 + 8,250 − 1,050 = 8,100. After café wages of 2,400, café profit is 3,700. Life fees of 2,000 spread over ten years give 200 income a year.

Manufacturers (1.3.20–1.3.22)

Raw materials consumed plus other direct costs make prime cost; add factory overheads and adjust for work in progress to reach production cost. Shared costs are apportioned between factory and office, and overheads between products, on a suitable basis such as floor area.

Worked example: Brannock Ceramics

Raw materials: 7,400 + 52,300 + carriage in 1,100 - 8,200   52,600
Direct labour                                                41,800
Royalties                                                     2,600
Prime cost                                                   97,000
Indirect wages 9,300; power 6,200; depreciation 5,000;
rent 3/4 of 16,000 = 12,000                                  32,500
                                                            129,500
Work in progress: + opening 5,600 - closing 4,100             1,500
Production cost                                             131,000
Manufacturing profit (20%)                                   26,200
Transfer to statement of profit or loss                     157,200

When goods are transferred at more than cost, closing finished goods hold unrealised profit. Closing finished goods at transfer price are 18,000, so unrealised profit is 18,000 × 20/120 = 3,000. Opening was 14,400 × 20/120 = 2,400. Deduct the increase of 600 from profit for the year, and show finished goods at 18,000 − 3,000 = 15,000.

Common errors

• Putting the whole allowance for irrecoverable debts in the statement of profit or loss instead of the change.
• Mixing up mark-up and margin: a 60% mark-up is a 37.5% margin.
• Recording loan interest to a partner as an appropriation.
• Crediting goodwill in the new ratio, or debiting it in the old.
• Leaving unrealised profit in the finished goods figure.

Next, try the practice questions.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2, September 2018, first teaching September 2015 (Pearson Education Limited). Unit 1, topic 1.3.